Attached files
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10-Q - METRO BANCORP, INC. FORM 10Q - METRO BANCORP, INC. | metro10q.htm |
EX-11 - EXHIBIT 11 - METRO BANCORP, INC. | ex11.htm |
EX-32 - EXHIBIT 32 - METRO BANCORP, INC. | ex32.htm |
EX-31.1 - EXHIBIT 31.1 - METRO BANCORP, INC. | ex31-1.htm |
EX-31.2 - EXHIBIT 31.2 - METRO BANCORP, INC. | ex31-2.htm |
Exhibit 99.1
Risk
Factors
Your
investment in our common stock involves risks. You should carefully consider the
risks described below as well as other information contained or incorporated by
reference in this prospectus supplement and the accompanying base prospectus,
including our historical and pro forma consolidated financial statements and the
notes thereto and the historical financial statements of Republic First and the
notes thereto, before making an investment decision to purchase shares of our
common stock in this offering. The risks and uncertainties described below and
incorporated by reference into this prospectus supplement and the accompanying
base prospectus are not the only ones facing us and Republic First. Additional
risks and uncertainties not presently known to us or that we currently deem
immaterial may also impair us and Republic First. If any of these risks actually
occur, our business, financial condition, liquidity, results of operations and
prospects could be materially and adversely affected. In that case, the market
price of our common stock could decline substantially and you could lose all or
a large part of your investment.
Risks Related to our
Company
We
may be required to make further increases in our provisions for loan losses and
to charge off additional loans in the future, which could materially adversely
affect us.
There is
no precise method of predicting loan losses. We can give no assurance
that our allowance for loan losses is or will be sufficient to absorb actual
loan losses. We maintain an allowance for loan losses, which is a reserve
established through a provision for loan losses charged to expense, that
represents management’s best estimate of probable incurred losses within the
existing portfolio of loans. The allowance, in the judgment of management, is
necessary to reserve for estimated loan losses and risks inherent in the loan
portfolio. The level of the allowance reflects management’s continuing
evaluation of specific credit risks; loan loss experience; current loan
portfolio quality; present economic, political and regulatory conditions;
industry concentrations and other unidentified losses inherent in the current
loan portfolio. The determination of the appropriate level of the allowance for
loan losses inherently involves a high degree of subjectivity and judgment and
requires us to make significant estimates of current credit risks and future
trends, all of which may undergo material changes. Changes in economic
conditions affecting borrowers, new information regarding existing loans,
identification of additional problem loans and other factors, both within and
outside of our control, may require us to increase our allowance for loan
losses. Increases in nonperforming loans have a significant impact on our
allowance for loan losses. If current trends in the real estate markets
continue, we could continue to experience increased delinquencies and credit
losses, particularly with respect to real estate construction and land
acquisition and development loans and one-to-four family residential mortgage
loans. Moreover, we expect that the current recession will negatively impact
economic conditions in our market areas and that we could experience
significantly higher delinquencies and credit losses.
In
addition, bank regulatory agencies periodically review our allowance for loan
losses and may require us to increase the provision for loan losses or to
recognize further loan charge-offs, based on judgments that differ from those of
management. If loan charge-offs in future periods exceed our allowance for loan
losses, we will need to record additional provisions to increase our allowance
for loan losses. Furthermore, growth in our loan portfolio would generally lead
to an increase in the provision for loan losses. Any increases in our allowance
for loan losses will result in a decrease in net income and capital, and may
have a material adverse effect on our financial condition, results of operations
and cash flows.
Our
results of operations may be materially and adversely affected by
other-than-temporary impairment charges relating to our investment
portfolio.
We
may be required to record future impairment charges on our investment securities
if they suffer declines in value that we determine are other-than-temporary.
Numerous factors, including the lack of liquidity for re-sales of certain
investment securities, the absence of reliable pricing information for
investment securities, adverse changes in the business climate, adverse
regulatory actions or unanticipated changes in the competitive environment,
could have a negative effect on our investment portfolio in future periods. If
an impairment charge is significant enough, it could affect the ability of the
Bank to pay dividends to us, which could materially adversely affect us and our
ability to pay dividends to shareholders. Significant impairment charges could
also negatively impact our regulatory capital ratios and result in us not being
classified as “well-capitalized” for regulatory purposes.
1
We
plan to continue to grow rapidly and there are risks associated with rapid
growth.
Over the
past five years we have experienced significant growth in net income, assets,
loans and deposits, all of which have been achieved through organic growth. We
intend to continue to rapidly expand our business and operations.
Subject
to regulatory approvals, we are targeting to open 15 to 20 new stores over the
next five years. We anticipate the cost to construct and furnish a new store
will be approximately $3.1 million, excluding the cost to lease or purchase the
land on which the store is located. Our ability to manage growth successfully
will depend on our ability to attract qualified personnel and maintain cost
controls and asset quality while attracting additional loans and deposits on
favorable terms, as well as on factors beyond our control, such as economic
conditions and competition. If we grow too quickly and are not able to attract
qualified personnel, control costs and maintain asset quality, this continued
rapid growth could materially adversely affect us.
Growth
may require us to raise additional capital in the future, but that capital may
not be available when it is needed.
We
anticipate that our existing capital will satisfy our capital requirements for
the foreseeable future. However, we may at some point need to raise additional
capital to support continued growth. Our ability to raise additional
capital, if needed, will depend on various matters, including our financial
condition, liquidity and results of operations, as well as on conditions in the
capital markets at that time, which are outside of our control. The current
financial crisis affecting the banking system and financial markets, which has
resulted in a tightening in the credit markets, could have an adverse effect on
our ability to raise additional capital. Accordingly, we cannot
assure you of our ability to raise additional capital, if needed, on favorable
terms, or at all. If we cannot raise additional capital when needed, our ability
to further expand our operations through internal growth, branching and/or
acquisitions could be materially impaired.
Unfavorable
economic and market conditions due to the current global financial crisis may
materially and adversely affect us.
Economic
and market conditions in the United States and around the world have
deteriorated significantly and may remain depressed for the foreseeable
future. Conditions such as slowing or negative growth and the
sub-prime debt devaluation crisis have resulted in a low level of liquidity in
many financial markets and extreme volatility in credit, equity and fixed income
markets. These economic developments could have various effects on
us, including insolvency of major customers and a negative impact on the
investment income we are able to earn on our investment
portfolio. Lending money is an essential part of the banking
business. Due to the current economic conditions, customers may be
unable or unwilling to borrow money or repay funds already
borrowed. The risk of non-payment is affected by credit risks of a
particular customer, changes in economic conditions, the duration of the loan
and, in the case of a collateralized loan, uncertainties as to the future value
of the collateral and other factors. The potential effects of the
current global financial crisis are difficult to forecast and
mitigate. As a consequence, our operating results for a particular
period are difficult to predict. Distress in the credit markets and
issues relating to liquidity among financial institutions have resulted in the
failure of some financial institutions around the world and others have been
forced to seek acquisition partners. The United States and other governments
have taken unprecedented steps in efforts to stabilize the financial system,
including investing in financial institutions. There can be no assurance that
these efforts will succeed. We could be materially adversely affected
by: (1) continued or accelerated disruption and volatility in financial markets;
(2) continued capital and liquidity concerns regarding financial institutions;
(3) limitations resulting from further governmental action in an effort to
stabilize or provide additional regulation of the financial system; or (4)
recessionary conditions that are deeper or longer lasting than currently
anticipated. We cannot assure you that any governmental action would
benefit us.
2
We
must continue to attract and retain qualified personnel and maintain cost
controls and asset quality.
Our
ability to manage growth successfully will depend on our ability to continue to
attract and retain management experienced in banking and financial services and
familiar with the communities in our market area. As we grow, we must
be able to attract and retain qualified additional management and loan officers
with the appropriate level of experience and knowledge about our market areas to
implement our operating strategy. The unexpected loss of services of
any key management personnel, or the inability to recruit and retain qualified
personnel in the future, could materially adversely affect us. If we
grow too quickly and are not able to attract qualified personnel and maintain
cost controls and asset quality, this continued rapid growth could materially
adversely affect us.
The
cost of re-naming and re-branding the Company and the Bank may be more than
anticipated.
On or
about June 15, 2009, we changed our name and the name of the Bank and began
using the red “M” logo. Several companies in the United States,
including companies in the banking and financial services industries, use
variations of the word “Metro” and the letter “M” as part of a trademark or
trade name. As such, we face potential objections to our use of these
marks.
On or
about June 19, 2009, Members 1st Federal Credit Union, or “Members 1st,”
filed a complaint in the United States District Court for the Middle District of
Pennsylvania against Metro, Metro Bank, Republic First and Republic First
Bank. Members 1st’s claims are for federal trademark infringement,
federal unfair competition, and common law trademark infringement and unfair
competition. It is Members 1st’s assertion that Metro’s use of a red
letter “M” alone, or in conjunction with its trade name “Metro,” purportedly
infringes Members 1st’s federally registered and common law trademark for the
mark M1ST (stylized). Metro intends to defend the case
vigorously. The complaint seeks damages in an unspecified amount and
injunctive relief. In light of the preliminary state of the
proceeding, it is not possible to assess potential costs and damages if Members
1st were to be successful in the proceeding. Any costs and damages
could materially adversely affect us.
We may
incur additional costs to defend our use, and may be required to further
re-brand our banking business. In addition, we cannot assure you that
unanticipated problems and costs will not arise in connection with our master
agreement with Fiserv Solutions, Inc. for them to provide to us certain
administrative and data processing services previously provided by TD
Bank.
Changes
in interest rates could reduce our net income and liquidity.
Our
operating income, net income and liquidity depend to a great extent on our net
interest margin, i.e., the difference between the interest yields we receive on
loans, securities and other interest earning assets and the interest rates we
pay on interest-bearing deposits, borrowings and other liabilities. These rates
are highly sensitive to many factors beyond our control, including competition,
general economic conditions and monetary and fiscal policies of various
governmental and regulatory authorities, including the Board of Governors of the
Federal Reserve System, or the “FRB.” If the rate of interest we pay on our
interest-bearing deposits, borrowings and other liabilities increases more than
the rate of interest we receive on loans, securities and other interest earning
assets, our net interest income, and therefore our earnings, and liquidity could
be materially adversely affected. Our earnings and liquidity could
also be materially adversely affected if the rates on our loans, securities and
other investments fall more quickly than those on our deposits, borrowings and
other liabilities. Our operations are subject to risks and uncertainties
surrounding our exposure to change in interest rate environment.
We
operate in a highly regulated environment; changes in laws and regulations and
accounting principles may materially adversely affect us.
We are
subject to extensive regulation, supervision, and legislation which govern
almost all aspects of our operations. The laws and regulations applicable to the
banking industry could change at any time and are primarily intended for the
protection of customers, depositors and the deposit insurance funds. Any changes
to these laws or any applicable accounting principles may materially adversely
affect us. While we cannot predict what effect any presently contemplated or
future changes in the laws or regulations or their interpretations would have on
us, these changes could be materially adverse to us.
3
Competition
from other banks and financial institutions in originating loans, attracting
deposits and providing various financial services may adversely affect our
profitability and liquidity.
We have
substantial competition in originating loans, both commercial and consumer in
our market area. This competition comes principally from other banks,
savings institutions, mortgage banking companies and other
lenders. Many of our competitors enjoy advantages, including greater
financial resources and access to capital, stronger regulatory ratios, and
higher lending limits, a wider geographic presence, more accessible branch
office locations, the ability to offer a wider array of services or more
favorable pricing alternatives, as well as lower origination and operating
costs. This competition could reduce our net income and liquidity by decreasing
the number and size of loans that the Bank originates and the interest rates we
may charge on these loans.
In
attracting business and consumer deposits, the Bank faces substantial
competition from other insured depository institutions such as banks, savings
institutions and credit unions, as well as institutions offering uninsured
investment alternatives, including money market funds. Many of its competitors
enjoy advantages, including greater financial resources and access to capital,
stronger regulatory ratios, stronger asset quality and performance, more
aggressive marketing campaigns, better brand recognition and more branch
locations. These competitors may offer higher interest rates than the Bank,
which could decrease the deposits that the Bank attracts or require the Bank to
increase its rates to retain existing deposits or attract new deposits.
Increased deposit competition could materially adversely affect our ability to
generate the funds necessary for lending operations. As a result, we may need to
seek other sources of funds that may be more expensive to obtain and could
increase our cost of funds.
Risks Related to the Pending
Merger with Republic First
The
pending merger with Republic First may distract our management from their other
responsibilities.
The
pending acquisition of Republic First could cause our management to focus their
time and energies on matters related to the merger that otherwise would be
directed to our business and operations. Any such distraction on the part of
management, if significant, could affect management’s ability to service
existing business and develop new business and otherwise adversely affect us
following the merger.
The
conditions to closing of the pending merger with Republic First may result in
delay or prevent completion of the merger, which may materially and adversely
affect us and the market price of our common stock.
Completion
of the pending merger with Republic First is subject to various closing
conditions, including, among other things, (a) obtaining regulatory consents and
approvals, (b) the accuracy of the other parties’ representations and warranties
and their compliance with covenants, subject in each case to materiality
standards, (c) completion of all payments and performance of all other material
obligations under the merger agreement, (d) delivery of tax opinions and (e)
absence of certain termination events as discussed below.
As a
result of the Bank’s recent charter conversion, the Bank is now supervised
jointly by the Pennsylvania Department of Banking and the Federal Deposit
Insurance Corporation, or “FDIC.” We cannot close the Republic First
merger until we receive the approval of the Board of Governors of the Federal
Reserve and the Pennsylvania Department of Banking. The Bank is
currently undergoing a routine regulatory examination. The
examination results may not be satisfactory to the Board of Governors of the
Federal Reserve and the Pennsylvania Department of Banking, and they may not
approve the merger or may require us to satisfy certain requirements to obtain
the required regulatory consents and approvals, and no assurance can be given at
this time that we will be able to satisfy any such requirements. Such
conditions could materially adversely affect us and the market price of our
common stock, and therefore we cannot assure you that the merger will occur in a
timely manner or at all.
In
addition, if certain termination events occur, Republic First may terminate the
Merger Agreement. Such termination events include, but are not
limited to, (a) the failure to complete the merger by October 31, 2009, provided
that either party may extend this deadline to December 31, 2009 in the event
that regulatory approval of the merger is not received by September 30, 2009,
(b) the receipt by Republic First of a superior proposal, as defined by and
under the terms of the Merger Agreement, and (c) our stock price trading below
certain levels. Under the terms of the merger agreement, the exchange ratio
determining the merger consideration will be calculated on the effective date of
the merger based on the average closing price of our common stock during twenty
(20) consecutive trading days ending on the third calendar day immediately
preceding the effective date of the merger. If such average closing
price is below $23.088 and our stock price has performed 20% below the
performance of the Nasdaq Bank Index in the period between the signing of the
Merger Agreement and the closing of the merger, Republic First will have the
option to terminate the Merger Agreement unless Metro increases the exchange
ratio in accordance to the terms of the Merger Agreement. Under these
circumstances, the merger may not close or it may be more dilutive than
expected.
4
Failure
to satisfy all of the closing conditions to the pending Republic First merger,
whether related to failing to obtain the required regulatory consents and
approvals, triggering certain termination events or otherwise, would prevent the
consummation of the merger absent a waiver of those conditions, as to which no
assurance can be given. Furthermore, even if we satisfy all of the closing
conditions, we cannot assure you that the consummation of the merger will not be
delayed beyond our current expectations, possibly significantly. Our inability
to consummate the pending Republic First merger or a delay in the merger’s
consummation could materially adversely affect us and the market price of our
common stock.
If
the merger with Republic First is not completed, we will have incurred
substantial expenses without realizing the expected benefits.
We have
incurred expenses in connection with the merger transaction and expect to incur
additional expenses prior to completing the merger. The completion of the merger
depends on the receipt of regulatory approvals. We cannot guarantee that we will
receive those approvals. If the merger is not completed, the merger-related
expenses that we will have incurred could materially adversely affect us without
any of the expected benefits of the merger.
We
may fail to realize the cost savings we estimate for the merger.
The
success of the merger, if consummated, will depend, in part, on our ability to
realize the estimated cost savings from combining the businesses of Metro and
Republic First. Our management estimated at the time the proposed
merger was announced that after the merger of the companies’ banking
subsidiaries it expects to achieve annual total cost savings of approximately
20% of Republic First’s 2008 non-interest expense, or approximately $5.0
million, pre-tax, through the reduction of administrative and operational
redundancies. While we believe these cost savings estimates are achievable as of
the date of this prospectus supplement, it is possible that the potential cost
savings could turn out to be more difficult to achieve than originally
anticipated. The cost savings estimates depend on the ability to combine the
businesses of Metro and Republic First in a manner that permits those cost
savings to be realized. If our estimates turn out to be incorrect or Metro and
Republic First are not able to successfully combine their two bank subsidiaries,
the anticipated cost savings may not be realized fully or at all, or may take
longer to realize than expected.
Combining
our two companies may be more difficult, costly or time-consuming than we
expect, or could result in the loss of customers.
We and
Republic First have operated, and, until the completion of the merger, will
continue to operate, independently. It is possible that the
integration process could result in unanticipated adverse
affects. Factors which will affect our ability to successfully
integrate our combined operations include, but are not limited to, our ability
to:
·
|
maintain
existing relationships with depositors in the banks to minimize
withdrawals of deposits subsequent to the
merger;
|
·
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continue
to operate the ongoing business of Metro and Republic First without
disruption, including Republic First’s adoption of Fiserv Solutions’
systems;
|
·
|
control
our incremental non-interest expense and maintain overall operating
efficiencies;
|
5
·
|
retain
and attract qualified personnel at the Bank and Republic First Bank;
and
|
·
|
compete
effectively in the communities served by Metro and Republic First and in
nearby communities.
|
Our
business is concentrated and economic conditions in the market areas currently
serviced by our companies could materially adversely affect our combined
operations.
Metro
operates principally in the Central Pennsylvania area and the operations of
Republic First are concentrated in Philadelphia, Pennsylvania. The
operating results of Republic First and Metro as a combined company will depend
largely on economic conditions in these and surrounding areas. A deterioration
in economic conditions in either of these market areas could materially
adversely affect our combined operations and:
·
|
increase
loan delinquencies;
|
·
|
increase
problem assets and foreclosures;
|
·
|
increase
claims and lawsuits;
|
·
|
decrease
the demand for our products and services;
and
|
·
|
decrease
the value of collateral for loans, especially real estate, in turn
reducing customers’ borrowing power, the value of assets associated with
nonperforming loans and collateral
coverage.
|
Risks Related to this
Offering and Our Shares
Our
share price may fluctuate.
The
market price of our common stock could be subject to significant fluctuations in
response to many factors, including, but not limited to:
·
|
actual
or anticipated variations in our results of operations, liquidity or
financial condition;
|
·
|
changes
in our earnings estimates or those of
analysts;
|
·
|
our
failure to pay dividends on common
stock;
|
·
|
publication
of research reports about us or the banking industry
generally;
|
·
|
changes
in market valuations of similar
companies;
|
·
|
whether
the transactions contemplated by the merger agreement with Republic First
will be approved by the applicable federal, state and local regulatory
authorities and, if approved, whether the other closing conditions to the
proposed merger will be satisfied;
|
·
|
our
ability to complete the proposed merger with Republic First and the merger
of Republic First Bank with and into Metro Bank, to integrate successfully
Republic First’s assets, liabilities, customers, systems and management
personnel into our operations, and to realize expected cost savings and
revenue enhancements within expected timeframes or at
all;
|
·
|
the
possibility that expected Republic First merger-related charges will be
materially greater than forecasted or that final purchase price
allocations based on fair value of the acquired assets and liabilities at
the effective date of the merger and related adjustments to yield and/or
amortization of the acquired assets and liabilities will be materially
different from those forecasted;
|
6
·
|
adverse
changes in our or Republic First’s loan portfolios and the resulting
credit risk-related losses and
expenses;
|
·
|
the
effects of, and changes in, trade, monetary and fiscal policies, including
interest rate policies of the Board of Governors of the Federal Reserve
System;
|
·
|
general
economic or business conditions, either nationally, regionally or in the
communities in which either we do or Republic First does business, may be
less favorable than expected, resulting in, among other things, a
deterioration in credit quality and loan performance or a reduced demand
for credit;
|
·
|
continued
levels of loan quality and volume
origination;
|
·
|
the
adequacy of loan loss reserves;
|
·
|
the
impact of changes in financial services’ laws and regulations (including
laws concerning taxes, banking, securities and
insurance);
|
·
|
the
willingness of customers to substitute competitors’ products and services
for our products and services and vice versa, based on price, quality,
relationship or otherwise;
|
·
|
unanticipated
regulatory or judicial proceedings and liabilities and other
costs;
|
·
|
interest
rate, market and monetary
fluctuations;
|
·
|
the
timely development of competitive new products and services by us and the
acceptance of such products and services by
customers;
|
·
|
changes
in consumer spending and saving habits relative to the financial services
we provide;
|
·
|
the
loss of certain key officers or other
employees;
|
·
|
continued
relationships with major customers;
|
·
|
our
ability to continue to grow our business internally and through
acquisition and successful integration of new or acquired entities while
controlling costs;
|
·
|
compliance
with laws and regulatory requirements of federal, state and local
agencies;
|
·
|
the
ability to hedge certain risks
economically;
|
·
|
effect
of terrorist attacks and threats of actual
war;
|
·
|
deposit
flows;
|
·
|
changes
in accounting principles, policies and
guidelines;
|
·
|
rapidly
changing technology;
|
·
|
other
economic, competitive, governmental, regulatory and technological factors
affecting the Company’s operations, pricing, products and services;
and
|
·
|
our
success at managing the risks involved in the
foregoing.
|
7
Stock
markets, in general, have experienced over the past year, and continue to
experience, significant price and volume volatility, and the market price of our
common stock may continue to be subject to similar market fluctuations that may
be unrelated to our operating performance or prospects. Increased market
volatility could result in a substantial decline in the market price of our
common stock.
Our
common stock is not insured by any governmental entity and, therefore, an
investment in our common stock involves risk.
Our
common stock is not a deposit account or other obligation of any bank, and is
not insured by the FDIC or any other governmental entity, and is subject to
investment risk, including possible loss.
There
may be future sales of our common stock, which may materially and adversely
affect the market price of our common stock.
Except as
described under “Underwriting,” we are not restricted from issuing additional
shares of our common stock, including securities that are convertible into or
exchangeable or exercisable for shares of our common stock. We anticipate that
we will issue approximately 4 million shares of our common stock upon the
closing of the Republic First merger. The closing of the Republic
First merger or our issuance of shares of common stock in the future, arising
from the closing of the Republic First merger or otherwise, will dilute the
ownership interest of our existing common stockholders.
In
addition, as of September 23, 2009, there were 6,532,409 shares of our common
stock outstanding. Most of these shares are available for resale in the public
market without restriction, except for shares held by our affiliates. Generally,
our affiliates may either sell their shares under a registration statement or in
compliance with the volume limitations and other requirements imposed by Rule
144 under the Securities Act.
As of
September 23, 2009, there were 1,010,511 shares of our common stock issuable
upon conversion, exchange or exercise in respect of outstanding securities,
warrants or options, and we had the authority to issue up to approximately
685,541 shares of our common stock under our stock option plans and 213,830
shares under our Dividend Reinvestment and Stock Purchase Plan.
Additionally,
the sale of substantial amounts of our common stock or securities convertible
into or exchangeable or exercisable for our common stock, whether directly by us
in this offering or future offerings or by existing common stockholders in the
secondary market, the perception that such sales could occur or the availability
for future sale of shares of our common stock or securities convertible into or
exchangeable or exercisable for our common stock could, in turn, materially and
adversely affect the market price of our common stock and our ability to raise
capital through future offerings of equity or equity-related securities. In
addition, we may issue other equity securities that are senior to our common
stock in the future for a number of reasons, including, without limitation, to
support operations and growth, to maintain our capital ratios and to comply with
any future changes in regulatory standards.
Our
common stock is currently traded on the Nasdaq Global Select Market. During the
twelve months ended December 31, 2008, the average daily trading volume for our
common stock was approximately 12,400 shares. As a result, sales of
our common stock may place significant downward pressure on the market price of
our common stock. Furthermore, it may be difficult for holders to resell their
shares at prices they find attractive, or at all.
Our
common stock is subordinate to our existing and future indebtedness and
preferred stock and effectively subordinated to all indebtedness and preferred
equity claims against our subsidiaries.
Shares of
our common stock are common equity interests in us and, as such, will rank
junior to all of our existing and future indebtedness and other liabilities.
Additionally, holders of our common stock are subject to the prior dividend and
liquidation rights of holders of our outstanding preferred stock. Our board of
directors is authorized to issue additional classes or series of preferred stock
without any action on the part of the holders of our common stock. Furthermore,
our right to participate in a distribution of assets upon any of our
subsidiaries’ liquidation or reorganization is subject to the prior claims of
that subsidiary’s creditors and preferred stockholders. As of June 30, 2009, we
had $224.4 million of outstanding debt and the aggregate liquidation preference
of all our outstanding preferred stock was $1.0 million.
8
Our
ability to pay dividends depends upon the results of operations of our
subsidiaries.
Neither
the Company nor the Bank has declared or paid cash dividends on its common stock
since the Bank began operations in June 1985. Our Board of Directors
intends to follow a policy of retaining earnings for the purpose of increasing
the Company’s and the Bank’s capital for the foreseeable
future. Although the Board of Directors anticipates establishing a
cash dividend policy in the future, no assurance can be given that cash
dividends will be paid.
Holders
of our common stock are entitled to receive dividends if, as and when declared
from time to time by our board of directors in its sole discretion out of funds
legally available for that purpose, after debt service payments and payments of
dividends required to be paid on our outstanding preferred stock, if
any. Prior to the completion of the merger with Republic First, we
must obtain the consent of Republic First prior to declaring or paying any
dividends on our common stock.
While we
are not subject to certain restrictions on dividends applicable to a bank, our
ability to pay dividends to the holders of our common stock will depend to a
large extent upon the amount of dividends paid by the Bank to
us. Regulatory authorities restrict the amount of cash dividends the
Bank can declare and pay without prior regulatory approval. Presently, the Bank
cannot declare or pay dividends in any one year in excess of retained earnings
for that year subject to risk based capital requirements.
This
offering is expected to be dilutive.
Giving
effect to the issuance of common stock in this offering, we expect that this
offering will have a dilutive effect on our expected earnings per common share.
The actual amount of dilution cannot be determined at this time and will be
based on numerous factors.
“Anti-takeover”
provisions may make it more difficult for a third party to acquire control of
us, even if the change in control would be beneficial to our
shareholders.
We are a
Pennsylvania corporation. Anti-takeover provisions in Pennsylvania law and our
articles of incorporation and bylaws could make it more difficult for a third
party to acquire control of us. These provisions could adversely affect the
market price of our common stock and could reduce the amount that shareholders
might receive if we are sold. For example, our articles of incorporation provide
that our Board of Directors may issue up to 960,000 shares of preferred stock
without shareholder approval, subject to the rights of the outstanding shares of
preferred stock. In addition, “anti-takeover” provisions in our articles of
incorporation and federal and state laws, including Pennsylvania law, may
restrict a third party’s ability to obtain control of the Company and may
prevent shareholders from receiving a premium for their shares of our common
stock.
Our
executive officers, directors and other five percent or greater shareholders own
a significant percentage of our company, and could influence matters requiring
approval by our shareholders.
As of
September 23, 2009, our executive officers and directors as a group owned and
had the right to vote approximately 24.0% of our outstanding stock and other
five percent or greater shareholders owned and had the right to vote
approximately 18.8% of our outstanding common stock. These shareholders, acting
together, would be able to influence matters requiring approval by our
shareholders, including the election of directors. This concentration of
ownership might also have the effect of delaying or preventing a change of
control of Metro.
Risks related to Republic
First
Republic
First’s earnings are sensitive to fluctuations in interest rates.
Republic
First’s earnings depend on the earnings of Republic First Bank. Republic First
Bank is dependent primarily upon the level of net interest income, which is the
difference between interest earned on its interest-earning assets, such as loans
and investments, and the interest paid on its interest-bearing liabilities, such
as deposits and borrowings. Accordingly, the operations of Republic First Bank
are subject to risks and uncertainties surrounding their exposure to change in
the interest rate environment.
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Republic
First’s earnings and financial condition may be negatively impacted by a general
economic downturn or changes in the credit risk of its borrowers.
Republic
First Bank’s results of operations and financial condition are affected by the
ability of its borrowers to repay their loans. Lending money is an
essential part of the banking business. However, borrowers do not
always repay their loans. The risk of non-payment is affected by
credit risks of a particular borrower, changes in economic conditions, the
duration of the loan and in the case of a collateralized loan, uncertainties as
to the future value of the collateral and other factors.
Republic
First’s results of operations are significantly affected by the ability of its
borrowers to repay their loans and if borrowers do not repay their loans,
Republic First will be exposed to credit risk.
Lending
money is an essential part of the banking business. However, borrowers do not
always repay their loans. The risk of non-payment is affected by:
·
|
credit
risks of a particular borrower;
|
·
|
changes
in economic and industry
conditions;
|
·
|
the
duration of the loan; and
|
·
|
in
the case of a collateralized loan, uncertainties as to the future value of
the collateral.
|
The
current economic and market conditions in the United States and around the world
may heighten the risk of non-payment. Generally, commercial/industrial,
construction and commercial real estate loans present a greater risk of
non-payment by a borrower than other types of loans. In addition, consumer loans
typically have shorter terms and lower balances with higher yields compared to
real estate mortgage loans, but generally carry higher risks of default.
Consumer loan collections are dependent on the borrower’s continuing financial
stability, and thus are more likely to be affected by adverse personal
circumstances. Furthermore, the application of various federal and state laws,
including bankruptcy and insolvency laws, may limit the amount that can be
recovered on these loans.
While
Republic First intends to maintain a prudent approach to extending credit by
undertaking due diligence and credit scoring to determine the risk of each
credit application, there can be no guarantee that these measures will be
sufficient to mitigate its exposure to credit risk. If Republic First
fails to adequately manage its credit risk, it could materially and adversely
affect them.
Republic
First may be required to make further increases in their provisions for loan
losses and to charge off additional loans in the future, which could materially
and adversely affect Republic First.
There is
no precise method of predicting loan losses. Republic First can give
no assurance that the allowance for their loan losses is or will be sufficient
to absorb actual loan losses. Republic First maintains an allowance
for loan losses, which is a reserve established through a provision for loan
losses charged to expense, that represents management’s best estimate of
probable incurred losses within the existing portfolio of loans. The allowance,
in the judgment of management, is necessary to reserve for estimated loan losses
and risks inherent in the loan portfolio. The level of the allowance reflects
management’s continuing evaluation of specific credit risks; loan loss
experience; current loan portfolio quality; present economic, political and
regulatory conditions; industry concentrations and other unidentified losses
inherent in the current loan portfolio. The determination of the appropriate
level of the allowance for loan losses inherently involves a high degree of
subjectivity and judgment and requires Republic First to make significant
estimates of current credit risks and future trends, all of which may undergo
material changes. Changes in economic conditions affecting borrowers, new
information regarding existing loans, identification of additional problem loans
and other factors, both within and outside of Republic First’s control, may
require Republic First to increase their allowance for loan losses. Increases in
nonperforming loans have a significant impact on Republic First’s allowance for
loan losses. If current trends in the real estate markets continue, Republic
First could continue to experience increased delinquencies and credit losses,
particularly with respect to real estate construction and land acquisition and
development loans and one-to-four family residential mortgage loans. Moreover,
Republic First expects that the current recession will negatively impact
economic conditions in their market areas and that they could experience
significantly higher delinquencies and credit losses.
10
In
addition, bank regulatory agencies periodically review Republic First’s
allowance for loan losses and may require them to increase the provision for
loan losses or to recognize further loan charge-offs, based on judgments that
differ from those of management. Republic First has taken action to resolve
certain credit and financial performance issues, including taking an $8.3
million special provision for the second quarter of 2009. If loan
charge-offs in future periods exceed their allowance for loan losses, they will
need to record additional provisions to increase Republic First’s allowance for
loan losses. Furthermore, growth in Republic First’s loan portfolio would
generally lead to an increase in the provision for loan losses. Any increases in
Republic First’s allowance for loan losses will result in a decrease in net
income and capital, and may have a material adverse effect on Republic First’s
financial condition, results of operations and cash flows.
In
addition to the special provision, in response to the March 2009 FDIC
examination, Republic First Bank is also required to enhance a variety of its
policies, procedures and processes regarding asset quality, earnings and loan
concentrations. Republic First Bank believes that it has already implemented a
number of changes to its policies, procedures and process in the last several
months that they believe address many of these issues. Similarly, following its
2008 compliance examination, Republic First Bank was notified by banking
regulators that its compliance function was subject to informal supervisory
oversight. Republic First Bank was required to improve its policies, procedures
and processes relating to its compliance monitoring functions. Republic First
Bank has already implemented a number of changes to its policies, procedures and
processes that they believe address most if not all of these
issues.
Republic
First’s concentration of commercial real estate loans could result in increased
loan losses.
Commercial
real estate, or “CRE,” is cyclical and poses risks of loss to Republic First due
to concentration levels and similar risks of the asset, especially since
Republic First had 86.2% of its loan portfolio in CRE as of June 30, 2009. The
banking regulators continue to give CRE lending greater scrutiny, and banks with
higher levels of CRE loans are expected to implement improved underwriting,
internal controls, risk management policies and portfolio stress testing, as
well as higher levels of allowances for possible losses and capital levels as a
result of CRE lending growth and exposures. Republic First’s management has
already reduced the concentration of CRE in its loan portfolio, and has efforts
underway to further reduce such concentration during the balance
of 2009. In addition, if the merger between the Company and Republic
First is consummated, CRE loans will be 46.8% of the Company’s loan portfolio on
a pro forma basis.
Republic
First’s results of operations may be materially and adversely affected by
other-than-temporary impairment charges relating to its investment
portfolio.
Republic
First may be required to record future impairment charges on its investment
securities if they suffer declines in value that Republic First considers
other-than-temporary. Numerous factors, including the lack of liquidity for
re-sales of certain investment securities, the absence of reliable pricing
information for investment securities, adverse changes in the business climate,
adverse regulatory actions or unanticipated changes in the competitive
environment, could have a negative effect on Republic First’s investment
portfolio in future periods. If an impairment charge is significant enough, it
could affect the ability of Republic First Bank to pay dividends to Republic
First, which could have a material adverse effect on its liquidity and its
ability to pay dividends to shareholders. Significant impairment charges could
also negatively impact Republic First’s regulatory capital ratios and result in
Republic First Bank not being classified as “well-capitalized” for regulatory
purposes.
Republic
First’s disclosure controls and procedures may not achieve their intended
objectives.
Republic
First’s system of internal controls cannot provide assurance of achieving their
intended objectives because of inherent limitations. Internal control
processes that involve human diligence and compliance are subject to lapses in
judgment and breakdowns resulting from human failures. Internal
controls can also be circumvented by collusion or improper management
override.
11
In
connection with Republic First’s management’s assessment of its internal control
over financial reporting at December 31, 2008, Republic First’s management
identified certain material weaknesses and significant deficiencies related to,
among other items, other than temporarily impaired investment securities and the
financial statement reporting process. Even though Republic First has
taken remedial actions which Republic First management believe have corrected
the identified material weaknesses and significant deficiencies, there is no
assurance that Republic First’s management will not identify new material
weaknesses or deficiencies or that additional measures to address such
weaknesses or deficiencies will not be required in the future. You should see
Item 9A and “Management’s Report on Internal Control Over Financial Reporting”
included in Republic First’s annual report on Form 10-K as well as Item 4 of
Republic First’s quarterly reports on Form 10-Q, all incorporated by reference
in this prospectus supplement and the accompanying base prospectus, for
additional information. Because of such prior material weaknesses,
there is an increased risk that material misstatements due to error or fraud may
not be prevented or detected on a timely basis by Republic First’s internal
controls.
Republic
First faces increasing competition in its market from other banks and financial
institutions.
Republic
First Bank may not be able to compete effectively in its markets, which could
adversely affect its results of operations. The banking and financial
services industry in Republic First Bank’s market area is highly
competitive. The increasingly competitive environment is a result of
changes in regulation, changes in technology and product delivery systems, and
the accelerated pace of consolidation among financial service
providers. Larger institutions have greater access to capital
markets, with higher lending limits and a broader array of
services. Competition may require increases in deposit rates and
decreases in loan rates, and adversely impact Republic First’s net interest
margin.
Government
regulation restricts the scope of Republic First’s operations.
Republic
First and Republic First Bank operate in a highly regulated environment and are
subject to supervision and regulation by several governmental regulatory
agencies, including the FDIC, the Pennsylvania Department of Banking and the
FRB. Republic First and Republic First Bank are subject to federal
and state regulations governing virtually all aspects of their activities,
including but not limited to, lines of business, liquidity, investments, the
payment of dividends, and others. Regulations that apply to Republic
First and Republic First Bank are generally intended to provide protection for
depositors and customers rather than for investors. Republic First
and Republic First Bank will remain subject to these regulations, and to the
possibility of changes in federal and state laws, regulations, governmental
policies, income tax laws and accounting principles. Changes in the
regulatory environment in which Republic First and Republic First Bank operate
could adversely affect the banking industry as a whole and Republic First and
Republic First Bank’s operations in particular. For example,
regulatory changes could limit Republic First’s growth and its return to
investors by restricting such activities as the payment of dividends, mergers
with or acquisitions by other institutions, investments, loans and interest
rates, and providing securities, insurance or trust services. Such
regulations and the cost of adherence to such regulations can have a significant
impact on earnings and financial condition.
Also,
legislation may change present capital requirements, which could restrict
Republic First and Republic First Bank’s activities and require the Republic
First and Republic First Bank to maintain additional
capital. Republic First and Republic First Bank cannot predict what
changes, if any, legislators and federal and state agencies will make to
existing federal and state legislation and regulations or the effect that such
changes may have on Republic First and Republic First Bank’s
business.
Republic
First anticipates increased and/or changes in regulations as a result of the
current turmoil in the financial markets and the efforts of government agencies
to stabilize the financial system.
Republic
First’s business is concentrated in and dependent upon the continued growth and
welfare of its primary market area.
12
Republic
First operates primarily in the Philadelphia geographic market. Its
success depends upon the business activity, population, income levels, deposits
and real estate activity in this market. Although Republic First’s customers’
business and financial interests may extend well beyond this market area,
adverse economic conditions that affect Republic First’s home market could
reduce its growth rate, affect the ability of its customers to repay their loans
to Republic First and generally affect its financial condition and results of
operations. Because of Republic First’s geographic concentration, it is less
able than other regional or national financial institutions to diversify its
credit risks across multiple markets.
Republic
First’s community banking strategy relies heavily on its management team, and
the unexpected loss of key managers may materially and adversely affect Republic
First’s operations.
Much of
Republic First’s success to date has been influenced strongly by its ability to
attract and to retain senior management experienced in banking and financial
services and familiar with the communities in its market. Republic First’s
ability to retain executive officers, the current management teams, branch
managers and loan officers of its bank subsidiary will continue to be important
to the successful implementation of its strategy. It is also critical for
Republic First, as it grows, to be able to attract and retain qualified
additional management and loan officers with the appropriate level of experience
and knowledge about its market areas to implement its community-based operating
strategy. The unexpected loss of services of any key management personnel, or
the inability to recruit and retain qualified personnel in the future, could
materially and adversely effect Republic First.
Republic
First has a continuing need for technological change and it may not have the
resources to effectively implement new technology.
The
financial services industry is constantly undergoing rapid technological changes
with frequent introductions of new technology-driven products and services. In
addition to better serving customers, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. Republic First
future success will depend in part upon its ability to address the needs of its
customers by using technology to provide products and services that will satisfy
customer demands for convenience as well as to create additional efficiencies in
its operations as Republic First continues to grow and expand in its market.
Many of Republic First’s larger competitors have substantially greater resources
to invest in technological improvements. As a result, they may be able to offer
additional or superior products to those that Republic First will be able to
offer, which would put Republic First at a competitive disadvantage.
Accordingly, Republic First cannot provide you with assurance that it will be
able to effectively implement new technology-driven products and services or be
successful in marketing such products and services to its
customers.
System
failure or breaches of Republic First’s network security could subject it to
increased operating costs as well as litigation and other
liabilities.
The
computer systems and network infrastructure Republic First uses could be
vulnerable to unforeseen problems. Republic First’s operations are dependent
upon its ability to protect its computer equipment against damage from physical
theft, fire, power loss, telecommunications failure or a similar catastrophic
event, as well as from security breaches, denial of service attacks, viruses,
worms and other disruptive problems caused by hackers. Any damage or failure
that causes an interruption in Republic First’s operations could have a material
adverse effect on its financial condition and results of operations. Computer
break-ins, phishing and other disruptions could also jeopardize the security of
information stored in and transmitted through Republic First’s computer systems
and network infrastructure, which may result in significant liability to
Republic First and may cause existing and potential customers to refrain from
doing business with it. Although Republic First, with the help of third-party
service providers, intend to continue to implement security technology and
establish operational procedures to prevent such damage, there can be no
assurance that these security measures will be successful. In addition, advances
in computer capabilities, new discoveries in the field of cryptography or other
developments could result in a compromise or breach of the algorithms Republic
First and its third-party service providers use to encrypt and protect customer
transaction data. A failure of such security measures could materially and
adversely effect Republic First.
Republic
First is subject to certain operational risks, including, but not limited to,
customer or employee fraud and data processing system failures and
errors.
13
Employee
errors and misconduct could subject Republic First to financial losses or
regulatory sanctions and seriously harm its reputation. Misconduct by Republic
First’s employees could include hiding unauthorized activities, improper or
unauthorized activities on behalf of customers or improper use of confidential
information. It is not always possible to prevent employee errors and
misconduct, and the precautions Republic First takes to prevent and detect this
activity may not be effective in all cases. Employee errors could also subject
Republic First to financial claims for negligence.
Republic
First maintains a system of internal controls and insurance coverage to mitigate
operational risks, including data processing system failures and errors and
customer or employee fraud. Should Republic First’s internal controls fail to
prevent or detect an occurrence, or if any resulting loss is not insured or
exceeds applicable insurance limits, it could materially and adversely effect
Republic First.
Republic
First is exposed to environmental liabilities with respect to properties to
which it takes title.
A
significant portion of Republic First’s loan portfolio is secured by real
property. In the course of Republic First’s business, it may foreclose on and
take title to real estate securing such loans and in doing so could become
subject to environmental liabilities with respect to these properties. Republic
First may become responsible to a governmental agency or third parties for
property damage, personal injury, investigation and clean-up costs incurred by
those parties in connection with environmental contamination, or may be required
to investigate or clean- up hazardous or toxic substances, or chemical releases
at a property. The costs associated with environmental investigation or
remediation activities could be substantial. In addition, as the owner or former
owner of a contaminated site, Republic First may be subject to common law claims
by third parties based on damages and costs resulting from environmental
contamination emanating from the property. Although Republic First
has policies and procedures to perform an environmental review before initiating
any foreclosure action on real property, these reviews may not be sufficient to
detect all potential environmental hazards. If Republic First were to
become subject to significant environmental liabilities, it could materially and
adversely effect Republic First.
Unfavorable
economic and market conditions due to the current global financial crisis may
adversely affect Republic First’s financial position and results of
operations.
Economic
and market conditions in the United States and around the world have
deteriorated significantly and may remain depressed for the foreseeable
future. Conditions such as slowing or negative growth and the
sub-prime debt devaluation crisis have resulted in a low level of liquidity in
many financial markets, and extreme volatility in credit, equity and fixed
income markets. These economic developments could have various
effects on Republic First’s business, including insolvency of major customers
and a negative impact on the investment income it is able to earn on its
investment portfolio. Lending money is an essential part of the
banking business. Due to the current economic conditions, customers
may be unable or unwilling to borrow money or repay funds already
borrowed. The risk of non-payment is affected by credit risks of a
particular customer, changes in economic conditions, the duration of the loan
and in the case of a collateralized loan, uncertainties as to the future value
of the collateral and other factors. The potential effects of the
current global financial crisis are difficult to forecast and
mitigate. As a consequence, Republic First’s operating results for a
particular period are difficult to predict. Distress in the credit
markets and issues relating to liquidity among financial institutions have
resulted in the failure of some financial institutions around the world and
others have been forced to seek acquisition partners. The United States and
other governments have taken unprecedented steps in efforts to stabilize the
financial system, including investing in financial institutions. There can be no
assurance that these efforts will succeed. Republic First’s business
and its financial condition and results of operations could be adversely
affected by (1) continued or accelerated disruption and volatility in financial
markets; (2) continued capital and liquidity concerns regarding financial
institutions; (3) limitations resulting from further governmental action in an
effort to stabilize or provide additional regulation of the financial system; or
(4) recessionary conditions that are deeper or longer lasting than currently
anticipated.
14